Europe’s Brexit Hangover

The market reaction to the Brexit shock has been relatively mild, because it was regional rather than global, with the impact concentrated in the UK and Europe. But the risk of European and global volatility may have been only briefly postponed.

NEW YORK – The market reaction to the Brexit shock has been mild compared to two other recent episodes of global financial volatility: the summer of 2015 (following fears of a Chinese hard landing) and the first two months of this year (following renewed worries about China, along with other global tail risks). The shock was regional rather than global, with the market impact concentrated in the United Kingdom and Europe; and the volatility lasted only about a week, compared to the previous two severe risk-off episodes, which lasted about two months and led to a sharp correction in US and global equity prices.

Why such a mild, temporary shock?

For starters, the UK accounts for just 3% of global GDP. By contrast, China (the world’s second-largest economy) accounts for 15% of world output and more than half of global growth.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

"And disintegration can of course be avoided by a political vision that balances the need for greater integration with the desire for some degree of national autonomy and sovereignty over a range of issues. "

The larger and more complex any system gets the greater systemic risk builds. Scale is the enemy of performance. The way to solve a very large and very complex problem is by breaking into smaller more manageable parts.

Looking at Europe - with as many languages as India has - Brexit seems to be playing itself out in many similar ways.
Back to Europe's history - with each Nation figuring it out, how to get the best from the Whole.
There is no equivalent of The Geographic Union that Europe tried to create a Federated Political Union from.
There is no African Union or American Union or Asian Union - history has given each Continent reasons for their Nationalisms.

The Anglosphere is unique - by offering hope to Migration from Europe for Three centuries.
As soon as Brexit happened, that hope was cut off - now the rest of Europe has to figure out how to create Continental Economics.
Without the easy option readily available accessible - migration to The Anglosphere.
Migration to Germany - the next and only alternative - is not the same thing as The Anglosphere.

Germany itself perhaps mulling its next move - in a history of shifting alliances within this New Europe.
Having to confront the rest from singling Germany out as the villain - given the history of Germany's rise to greatness.
Brexit out of India in 1947 left the different factions not trusting each other - to split into Two Unions, then Three.
Brexit out of Europe in 2016 seemingly suggestive of a similar outcome - GERMANIA in the North, LATINA in the South.
That's Two Unions to begin with, then Three or more - take your pick.

The English language perhaps the One glue that keeps India United.
The Anglosphere perhaps the One glue that keeps Europe United.
United seemingly to end the dominance of English...if only Non-English could become One Language !!
Non-English is One Language with many believers - in Berlin, in Bejing as in Brussels.
Berlin and Beijing brought together by The Bear in a Game of Thrones with endless possibilities.

It is so interesting to note how unbiased the politicians and their cronies in the media have been all these months and years, and suddenly all the bad news started to come out now, only a few days after the Brexit referendum outcome, and being blamed entirely on the Brexit referendum, as if people have been so stupid and naive all this time to not realise that the economies of their countries are in shamble and that they are being led by a bunch of morons.

The McCrone Report of 1974 advised the then Heath Conservative Guvnt that Oil would make Sterling an Oil Currency and the result would be the destruction of UK based manufacturing due to the currency being elevated. AKA labour cost diferential

Globalisation has introduced the same labour cost differential but on a wider scale and with widespread manufacturing base destruction. As the 70s experiment had clearly displayed how this works I fail to see how anybody in their right mind cannot have expected the outcome from globalisation

Whilst it is understandable that the UN endorsed globalisation with Article 21 of 1992 it is more difficult to understand the EU and US enthusiasm for it as the objective for the world has become a race to industrialise exploiting labour cost differentials with the West with every country in the World seeking a Western model and lifestyle accompanied by an exploding population enabled by Western medical knowhow intervention

The fundamental of globalisation is it will affect some more than others in society hence inequality. Those who enable or assist global trade are rewarded. Those unable to respond to the new labour rate are culled from the workforce or face reduced real income. Corruption is a lever but it has to have something to pivot on. That pivot is the wealth opportunity enabling globalisation offers

As wealth seeps from the West social discord follows in the West and trade has to slow as it is based on diminshing capability to consume in the West. The East then tries to build its domestic service sector just following the Western progression compressing the Industrial Revolution to today cycle from 150 years to a matter of decades assuming ever expanding consumption and assuming demographic advantage from a population explosion can be made real which is most unlikely as a resource crisis will follow

The reason Brexit has occurred with the UK rather than with another EU country is simple. The UK is further through the process of economic diembowelling than other EU countries because of the North Sea Oil event which enforced 'reform' or social and work changes. Other major countries such as France and Italy have yet to undertake the 'reform' the UK undertook in the 70s onwards

Germany currently is cossetted by the imbalances of the euro which give it something in the order of 10% currency advantage against having the DMk. That is why Merkel fights to keep the eurozone intact whether it damages the Med Club. Longterm the EZ cannot function with the imbalances, at that point Germany is deep in trouble

This has less to do with corruption and everything to do with labour cost differentials. Italy is due to be a cauldron with social discord in the South due to growing unemployment and NPL debt issues widespread in the North which is the industrial zone. France is not far behind as its social taxation on business melts the business base away combined with its culture of street riots

The tipping point comes when a minority becomes a majority and consider themselves sufficiently dispossessed to express it when the opportunity comes along. In the UK that was Brexit. In Italy and France it will be GEs

As the EU can do nothing about labour cost differentials with the East and refuses to deal with EU internal labour rate differentials all it can do is watch the tide come in. Internal membership opportunism eg the V4 and World Trade Agreements just are further fuel to fed the problem.

Steve Jobs whose entire business strategy was based on offshoring manufacturing was asked by Obama would manufacturing come back to the US and his response was never. Every manufacturing job is the tip of a job iceberg with between 5 and 10 related jobs in the economy. Gestation of impact is 18 months with a cascade effect, a slow moving falling domino effect

Roubini implies in closing that greater EU integration can provide some comfort but this is a nonsense, greater integration will infact amplify the imbalances and lack of flexibility in the EU as reform is continually blocked by voter blocs and cannot be overcome by so called integration. This can only encourage further subsidy demands not dimish them as imbalance creeps localised debt upwards. Continual subsidy either from wealthy to poorer member states or from the ECB simply defers and therefore grows the problem as it assists paralysis and impedes reform. Sooner or later the ship turns turtle overloaded with passengers and a skeleton crew

Steve, as we both well know, there are always multiple causes to a particular problem. Yes globalisation is a contributory factor to today’s problems, but it is not the only factor. Inequality, which includes cronyism in all its forms and corruption at all levels of society, and more especially among the political and financial classes, is a key factor. A century ago, the world may have been lucky to have only one known Dr. Frankenstein; today’s world is having to deal with a multiple of them, most of whom are a bunch of amateurs.

Inequality is based on globalisation and root catalsyt is the surge in labour onto the world market. That is not resolvable without taking steps to inhibit the imapct of global labour surplus. Demographics and AI/robotics are also building effects

Dr Victor Frankenstein will need to source new body parts for his creation

Steve, you are very much correct, the political and financial leaders decided to live in a big bubble and to believe what they say. When all the fundamentals in the UK, the EU and the US, are very much unstable and the social fabric of these countries is being attacked continuously under the banners of “Austerity”, “Reforms”, “Terrorism”, “Migration”, etc.., always ignoring or side-lining the one and only root cause of all problems and that is “inequality”, this is what one gets. The big banks and listed companies are going to continue to have dismal results, the commodities market shall remain depressed, the equity and forex markets are having a very short lived revival, etc. The real effect however, of the policies of the last 8 years, is going to appear in December after the results of the US presidential elections. Trump has already warned of a recession next year in the US, the fundamentals in the UK and the EU are dismal to say the least and this notwithstanding any Brexit or no Brexit, crime is on the rise across the board (and the latest by the politicians and their cronies in the media is to now blame any crime on mental health issues). Real job opportunities are lacking and we have the current political leaders continuing with business as usual, playing golf, meeting with the lobbyists and being influenced and dominated by their team of ignorant advisers, friends and consultants, it is like “the blinds, are leading the blind”, no offence meant to the blind sighted of course. We commentators on PS have predicted most of the events that took place in the last few years and proposed solutions. If only 1% of these solutions were executed, things would have been totally different today.

Botched Military Coup? Who say's it was botched? Can't prove it was really unless we really know who was involved? Who is to say it wasn't a clever Stalinesque move by President Erdogan to enable him the mandate to remove obstacle figureheads in his way?

@Thaomas
The IMF has recently estimated that Italy’s economy will not return to its pre-crisis size until 2025. It makes no difference whether there is a bail in or bail out and NPLs will continue to rise. This is not sustainable economically or politically. Apart from anything else demographics will come into play with an ageing population amplified by fleeing youth. Youth unemployment at 44%, steadily rising and in some locations has reached 75%

'On 11 September 2015, Father Zanotelli spoke at the funeral of 17-year-old Gennaro Cesarano, whose death – linked to the latest outbreak of mob violence in the southern city – led him to conclude that the local situation was “worse, in some ways, than in the shanty towns of Nairobi”, where he had worked for several years.'

The inequalities within EU of member nations is starkly visible in the current fluid situation. Stronger economies have managed to stay above water & pull the weaker ones from sinking. But for how long? Brexit has created much problems not only for UK but also for EU. An unprecedented verdict of exiting the EU, has meant uncertainty & daze for UK. In fact the staunchest Brexiters are developing cold feet unsure of themselves. At the same time. EU member nations are clueless as to the future course of action. Taken together with the terror strikes becoming a daily feature across Europe & the vexed migrants issue, Europeans seem as dazed as the British. In this fluid situation, the far right nationalist movements have unwittingly gained prominence, from the AfD in Germany to the National Front in France to the UKIP in Britain, not to mention the Five star movement in Italy. The mess is likely to get messier were Trump to succeed as President. With his shrill rhetoric on NATO & on multilateralism, Europe remains wary of a Trump Presidency in exacerbating the situation. Russia seems to be silently watching the developments in the fond hope of a EU breakup.
Meanwhile central banks in Europe have started resorting to negative interest rates signalling deflationary pressures thus complicating the economic outlook. With stagnant growth, huge deficits, increasing social sector spends, low productivity, high unemployment & influx of migrants, the smouldering cauldron looks like its reaching inflection point.
There seems to be no rainbow beyond the gloom as world growth stagnates with China leading the way. An assertive China seems to embark on an hegemonic crusade taking advantage of the myriad problems in the West. Japan refuses to move up from its economic nadir while US looks set for turbulence with a new President. A combination of factors, with Brexit being just one of them, brings us to the question, will it be EU(logy) for a stumbling & bumbling Europe??

Every single luminary economist in this forum is saying" a new vision is needed" at some stage in their article. Yet all of them are falling short of proposing anything concrete outside of small adjustments or tweaks that can be made here and there. No visions are actually forthcoming.

I would have thought as the leaders in economic thought for the world you would all be bursting at the seams to propose comprehensive visions of how economies should work. Instead you seem content to focus on one little area of specialization and are frustrated that all the other areas are not co-operating with your area of expertise.

In a way you remind of the motor manufacturers. Perhaps you are too close to the problem to innovate. Why did Google build the self driving car? Why did Tesla build the first electric car people want to buy? (They are auto industry outsiders)

Luminary economists need to create written down public economic visions. It doesn't have to be all 'research based' - where it is backed by research evidence - say so - where it is backed by gut feel - also say so. It also doesn't need to be all authored by you. You can copy parts from other economists, let your students author other parts, or even open source to the public other parts. What it does need to be is YOUR comprehensive vision.

They could be done in different ways - a recreation of the economy in a spreadsheet, a document only economics phd's can understand or a very accessible document Six Pack Joe can understand if he really wanted to. It can be text, audio or video. It can be revised and updated (see Wikipedia) - it is ok to change your mind as new facts and ideas come to light (see Keynes famous quote).

But without a personal vision of what should be achieved economists are not really economists at all. They are at best commentators. The difference is more clear in sports - compare the head coach to the television commentator. You need to be like the coach and less like the commentator.

So - laying down the gauntlet to all luminary economists - where is the detail of the vision you claim is so badly needed?

I also believe that the new vision of EU ought to go back to the original vision for organizing EU in the first place - a unified Europe for strong defense against external threat and for strong trade negotiation with the rest of the world - without any heavy duty overhead and while maintaining individual country's sovereignty.

Maybe they could maintain an EU internal exchange rate, allowing each country to keep its own currency but exchange with the rest of the world with the Euro. Would that do it ?

Thanks for your point Steve. They are well taken. The only thing I would add is although politicians do just make up economic policies they build these off a menu provided by economists.

For example, QE and helicopter money are on the menu. Off the menu is splitting up the banks or giving workers veto vote in corporations. Hence I would say the REAL decision makers are still the economists because they author the menu.

@Micheal
do you believe in facts that mention the humain as a wolf for humain ?
if you do
you can understand that the fact that we lived with a whole of creatures who cherche to find there interest and don'T think a bit about others so the countries as well have the same feelings towards the other countries so in the reality they and i mean the decider men like to have chaos rather then the order and the harmony

This is because politicans make up most economic policy not economists

The next thing they talk about is debt; aka spending 'OPM, other peoples money', usually about having more of it or less of it, usually more; they like spending OPM. They like 'more' when things are 'not good' but seldom recognise, with the odd exception, when things are 'good'. When was the last time you heard an economist say things are 'good'. Like never. Thus they mainly ask for more debt, more of OPM. Like farmers who never get the right amount of rain, economists never get the right amount of debt. When did you hear an economist say we have the right amount of debt. At some point between having too much and too little we must have the right amount but economists can never identify that state. As any idiot can say we have too much or too little accuracy is not the professions forte

Economists on the whole direct their speech at politicans not the public so on the whole they do not talk about things that affect the public immediately and everyday hence the public do not take much notice

I think most of them need some sort of therapy, perhaps a collective noun for economists would help. How about 'helicopter', a helicopter of economists, does that help

The author of this article is living in a world of his own. The real effect of any Brexit, if such a Brexit, ever happens will not be felt until after it really happens, if it ever happens and the odds of an EU break up before any Brexit happening are much higher in the short term, 2017 shall be a very interesting year and yet, as long as the 1% remain in control nothing significant can happen to the financial system. The main worry is the real economy which is lacking growth and jobs and the high number of job redundancies that have started to be executed all over the place. And it is the lack lustre in the real economy and the real high unemployment that will decide the events in the coming four years. Real growth however, cannot happen without Sovereignty and political stability and real peace among the nations and we are a long way from achieving these add to this mix the SS mind sets of the political elites and the use of the 4 big names in technology to advance their self serving agendas at the expense of the tax payers, one is in for a very bumpy ride indeed.

I am sure that the initiative of the EU is in the first place a good step toward the establish of a new model in international Order based on the interdependence and the peace and security but it will be never enough to save European country neither the whole glob cause it is with no efficiency with a world contained a people who had been always influence by the realist approach

There are no democratic and politically acceptable ways to integrate what is fundamentally different. No Dutch or German will ever pay for crashed Italian banks. No Italian or Greek will accept eternal "austerity". A politically definded exchange rate of 1:1 between the German/Dutch societies on the one side and the Italian/Greek socities on the other side is fundamentally unfair to both sides.

In conclusion, the disintegration of the "EU" and the eurozone is inevitable. Our vision has to be the restoration of democracy, the restoration of the rule of law and the restoration of the balance of powers. The new vision is that despite many similarities we are different. The new vision is mutual respect of our differences. The new vision is the right of self determination for every country (i.e. full national sovereignty). The new vision is: No taxation without representation (i.e. full parliamentary control over the budget). The new vision is that treaties and the rule of law are respected (i.e. constitutionality). The new vision is thus the liberation of Europe and the destruction of the "EU" (it could be replaced by a settlement that maintains most trade links by combining substantial access to the single market with very strict limits on migration and with decisions made unanimously).

The new vision for EU has got to strengthen 2 fundamental concepts that created EU in the first place - a unified Europe for strong defense against external aggression and for strong trade negotiation with the US, China and other strong trading powers - without sacrificing individual country's sovreignity. Would that meet most Europeans' expectation of the new EU ? Thanks.

Indeed it was, and within 75 years of unification its "leaders" had dragged the German-speaking peoples into the two worst conflagrations the human race has ever seen, leaving the country quite literally destroyed, bombed to pieces with millions killed.

The German speaking peoples who managed to stay outside this holocaust were the democratic Swiss who maintained a policy of independent armed neutrality.

Aggressively narcissistic, machiavellian, psychopathic politicians make wars for other people to die in.

Unless they stop identifying with their national identity and become Europeans. Germany was once many little nations. So was France, Italy and everywhere else. Of course, we drum nationalism into people from a young age and then expect them to act differently when adults. Ever meet a French kid who supports the German soccer team?

Professor Roubini's fingers on EU's pulse is right on. Brexit vote is telling the EU bureaucracy that the integration needs some fine tuning and Trump candidacy is telling NATO bureaucracy that it needs some fine tuning as well. Roubini is right that EU is crying out for a new vision and a new generation of leaders to lead Europe.

i remember that in 2008/09, a Swiss writer was adamantly bet that Greece would leave EU and there would be risk of disintegration. Somehow interested parties carried out patching works and the block soldiers on for almost another decade. But patches are only momentary solutions, and might soon exceed their useful lives. Sigh.....

i guess that the European people are in there source of thinking not affected by the doctrine of interdependence that was first announced buy victor Hugo and Voltaire and they will never abandon there nationalism ideas and that is the major reason for the disintegration Of EU in the long term

there is many solution to Resolving problems faced the EU and make his steps slow toward the target and it is the federal doctrine in our subject ; the major one of theme is the necessity of created an sphere of Confidence among the people of the nation and here where the role of the leaders appear and in our time the leaders establish the chaos rather then the order but we still have the chances in the new generation and for this i believe that the investment in them is the only solution and t we can all do this in the street like a brothers or in the schools like professor the future is for as not for any other

I agree it is staggering how many of the great and good repeat each other and themselves on forums like ProSyn. It really does reveal the level of GroupThink that exists among the academic / political class.

Although i agree with the majority of what Dr Roubini has mentioned in his article, i do feel he is just scratching the surface.

Here are a couple of key tail risks that i believe are under appreciated.

1. Debt levels are unsustainable in the West and the complete wrong incentives are in place to reduce them.
2. China - bogus numbers and its acceptable - why isn't the market punishing them more for this?
3. QE has distorted risk valuations, flattened the yield curve and thus if the distortions ever stop... which i have to assume they will, the bubble thats been created in government debt, property and pretty much every other market will pop to an even larger extent.

Ultimately if we don't have inflation by now. We are heading for deflation unless they do Helicopter money of a large scale.

I believe that your comment on China is way off - "2. China - bogus numbers and its acceptable - why isn't the market punishing them more for this?".

First of all, China has a "managed market economy" and those "so called bogus numbers" are what they are being managed to. So, believe it or now, those are the numbers in China. As to the market punishing China, they have - the hedge funds bet on the Yuan devaluation earlier this year lost their shirts. So they are gone. What's left is capital flight and that is being managed by China.

Bank ledgers in Italy, Portugal, Spain, Germany are almost certain to move faster than 27 1/2 member states can make agreement. Debt never sleeps and the NPLs keep rolling, rolling. Europeans are not bothered about growth in China, they are bothered about growth in Europe. Growth in China does not mean the problems go away in Europe. Growth in China has been accompanied by growth in problems in Europe

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